Game Over, Man

Bear Stearns is about to get Raptured.

Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.

People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading. "None of these things is done until they're done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone's expectation is sometime in the early evening hopefully" the deal will be done.

Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.

Our cultural doomsayers have been predicting something like this for years. The surprise, for many of them, is that it wasn't China that pulled out the rug. To debate: What should the Fed do? (Now that Ron Paul won't be president we're more or less stuck with it.)

Some thoughts from occasional reason contributor Megan McArdle.

Comments

[Chris Potter]

The sad thing is, the MSM will spin this as another example of the failure of the small government, free market policies of the Bush administration. The parallels to the myth of the laissez-faire Hoover administration are striking.

One thing I'm certain of is that America won't turn to Ron Paul, or anything resembling sanity. This rabbit hole goes a long way down, folks.

[Christopher Monnier]

Even our distorted form of capitalism works eventually...

[In Keeping With The Headline]

We have to nuke Bear from space.

It's the only way to be sure.

[John C. Randolph]

What should the Fed do?

It should let BSC collapse. A free market is a a profit and loss system, where losses serve to remove incompetent management.

-jcr

[Juan]

Isn't this, like, the least bad option among things that could happen to the Bear?

[Mike]

Is there a post or article anywhere that tries to explain the subprime mess from a libertarian viewpoint? What was making people behave like idiots for so long?

[Famous Mortimer]

Forgive my ignorance, but is this yet another instance of geeky economists declaring that the sky is falling?

I guess shit like this matters to people who play Monopoly 24 hours a day, but to those of us who don't have kids, a ridiculous car payment, or mortgage, waiting for the economy to right itself is simply a matter of time.

However, it's nice to see yet another series of eco-geek opinions about who was right, and wrong all along, and how fucked everybody is.

[Carter Burke]

Wait a minute. There's a significant dollar value attached to this installation.

[Chris Potter]

Well, the question is whether the economy will be allowed to right itself. You may not have kids or a mortgage, but a lot of people do, and as the bumper sticker says, THEY VOTE.

[Lord Cthulhu]

I CRAVE THE FLESH OF THE LIVING...

AND I VOTE!

[Burke]

Look, this is an emotional moment for all of us, okay? I know that. Let's not make snap judgments, please. This is clearly-clearly an important species we're dealing with and I don't think that you or I, or anybody, has the right to arbitrarily exterminate them!

[Kolohe]

"What should the Fed do?"

What they did with Bear Sterns was a deviation from their normal mandate and used dual path to legimize it. They used
1) a middleman to front the op (JP Morgan), and
2) a short-handed vote to authorize (normally 5 out of 7 need to agree to lend to a non-bank; but two seats are empty, and one dude (or dudette) was on vacation in Europe and could not be reached, so they invoked an emergency clause to get the four dudes(ettes) to bless the transaction.

Now, since they tried to follow the spirit and letter of the law as much as possible, and were presented with a genuine crisis (of unknown magnitude until hindsight clears up to 20/20 with the bifocals of time), I am willing to cut them so slack on this one.

Unlike many around here, I am not opposed to fiat money, fractional banking, nor the federal reserve system.

The problem is they can't do much anymore. The fed can normally only do three things open market operations, adjust the discount rate, or adjust reserve requirements.

Well, they obviously they ain't going raise reserve requirements in a credit crunch.

The open market operations don't seem to have the market's cooperation, as seen by current spreads from the target funds rate and money is costing these days.

The discount rate is down to 3 and half, and half as much as it was a year ago. They'll probably drop another 3/4 this week (I doubt they'll go the full point, but many are betting that way). The flat CPI in Feb gives them a narrow window to create cheap money with a lowered inflation risk. They could go to zero (the Japanese did), but I can't seem them going back to the 1-2 percent in the absence of a real crisis (like 9/11) before inflation and foreign exchange obliterates the gains from such a move. So, they have little room to maneuver after this week's move.

By letting things go as long as they(the fed) did (i.e. until the early 2006 tightening), and the non-intervention by the Bush administration on the political front - either with soft power of the Treasury dept or the hard power of the regulatory agencies, nobody has any 'leverage' - or rather insufficient leverage against the way the negative leverage of the unwinding derivatives.

[The Dude]

Nothing is fucked man.

[Rosco1776]

I too have no mortgage, loans or kids but I am worried and I do not like the way the country is heading. I'm still campaigning for Ron Paul so if nothing else, his message gets out to as many people as possible and people will begin to wake up to the crooked politicans and bankers.
The bailout shouldn't have happened! I understand that the FDIC only needs 10% of liquid assests to cover the FDIC insurance! Don't count on your savings in a bank unless it's in a safety deposit bank.
Famous Mortimer, the economy will not right itself without major changes like getting rid of the fiat money system we so now enjoy and keep spending money overseas like there's no tomorrow.
http://www.minneapolisfed.org/pubs/region/98-09/feldman.cfm

[Kolohe]

I also things are both worse and better than they appear. Or more precisely they are going to get worse before they get better, but they will get better.

Worse, in that the real peak of crappy mortgages will only come to a head later this year. The worse standards and a outsized chunk of money are in loans written in early 2006 - thus mid 2008 is when a peak of the Chickens come home to roost. So things are going to be really bad this summer, and we will be in a definite recession in qtr 2 and 3 of CY 08.

But better, in that after this wave is past, things will start looking up
a) By 4th qtr 08, a lot of toxicity will be out of the system.
b) Plus obviously by Nov we will known who the president (and Congress) will be over the next 4 years (notwithstanding 2000). And it doesn't matter who it is, it it the uncertainty that will dominate the financially markets until then - once resolved, it will be 'right-sized'. And I don't thing the 'masters of the Universe' will necessarily be running scared at a "crytpo marxist Obama' president-elect. I think they will see him a someone they can do business with (in return for throwing their weaker members under the bus - e.g. cooperation indictments in cases like Bear Sterns)
c) And as a side effect, if the Democrats do get the white house, as is likely, the Iraq debacle will not necessarily be over, but there will definitely be a pull back, and thus the economic drain will abate. Although the gains will be more long term (e.g. the peace dividend took about eight years to get the tech boom), the 'certainty' of the Iraq path will start to be priced into system and thus strengthen the structural elements that are weak now.

The coming recession will also pop the bubble of commodity prices as demand finally abates, and the speculators take their profits and/or cover.

So if I knew how to do this, I would short gold, oil, and the Euro for closing prices of

$800, $80, and $1.30 respectively sometime in the first half of Jan 09.

[John C. Randolph]

Unlike many around here, I am not opposed to fiat money, fractional banking, nor the federal reserve system.

Oh, so fraud is just fine and dandy with you? (Not to mention that this particular Ponzi scheme happens to be unconstitutional.)

If there's a case to be made for the convenience of funny money, then let's have that debate: propose a constitutional amendment to repeal the gold and silver clause, and let's see if it gets ratified. The business-as-usual practice of ignoring the parts of the constitution that are inconvenient for those in power has to stop.

-jcr

[John C. Randolph]

I'm still campaigning for Ron Paul so if nothing else, his message gets out to as many people as possible and people will begin to wake up to the crooked politicans and bankers.

Ron Paul has already achieved far more than I could have hoped for a year ago. He's put things back on the agenda that nearly everyone had given up for lost back when Nixon devalued the dollar in 1971.

If the Soviet Union and the Berlin Wall can come down in my lifetime then damn it, so can the Federal Reserve and the IRS.

-jcr

[John C. Randolph]

if the Democrats do get the white house, as is likely, the Iraq debacle will not necessarily be over, but there will definitely be a pull back, and thus the economic drain will abate.

You're dreaming.

The democrats know better than to shut down the biggest corporate welfare program the world has ever seen. Try to stop the war, and the military-industrial complex will yank their chain pretty damn hard.

-jcr

[Kolohe]

People who decry the Fed as unconstitutional (as opposed to a bad policy) are just nanometer apart in my book from those who decry the income tax as unconstitutional (again, as opposed to bad policy)

To wit, Gold and Silver clause:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts

Is *not* about the federal governments ability to create paper instruments of value, it's a supremacy-type clause that gives the Fed exclusive ability to do so - and thus not the states.

Unless there is some other gold and silver clause I am not aware of.

[Colin]

It's sad that one of our nation's great investment banks is collapsing like this.

It's even sadder that one of our nation's great investment banks got so involved in what is in essense junk mortgages.

Let 'em rot.

[John C. Randolph]

People who decry the Fed as unconstitutional

I've read the constitution too. It does not authorize fiat currency from the federal government, and explicitly prohibits the states from issuing fiat currency. It authorizes coinage. Coining money means striking coins of a valuable metal, not issuing irredeemable promissory notes.

-jcr

[John C. Randolph]

Well, JP Morgan gets the bailout windfall. They're buying BS for $2/share. Wish I'd shorted BSC on Friday.

-jcr

[Kolohe]

And on the policy side, the main reason we can't go back to the gold standard (et al.) is the same reason why you can't go back to the crib you were in as a toddler - we're simply too big.

The number of panics and crises in the 19th c (more precisely pre-Fed, because 1907 was also a doozy) dwarfs those in the 20th. Even though the Big One of the 20th, was course, both wider and deeper - why it was is complex and was partly but not largely caused by specific Fed policy at least not in prolonging it, and so I believe is not as important to this discussion as many would attribute to it

But IMO the reason why they all seemed not so bad is that only the 'capitalists' literally the people with capital were the only affected. Up until the closing of the frontier in 1890, and really for a generation after that, until the Great Depression, many of the hoi polloi could ride out the boom and busts because they were subsistence farmers, and could just ride out any cycle by living off their land. However, since the industrial revolution is now complete, and only 3% of us grow food, the rest of us cannot afford the spectacular peaks and troughs that were prevalent in pre-Fed America.

[Kolohe]

Wow $2. (cue Better of Dead references)

Speaking of dead, I think this deal is DOA. The shareholders have to approve it, but I don't think their going to go for such a low ball figure (considering the CW was $15-20 earlier this weekend)

Obviously $2 is better than the jack and shit they have a good chance of getting. But I think they'll hold out hope that someone else (for instance J C flowers, who was also named as a possible buyer) would possibly bid more than just $2. Esp if they can manage to offload more bad debt on third parties - including Uncle Sam. I mean heck isn't their HQ probably worth more than $237 million?

[BakedPenguin]

Kolohe - You can buy put options on all of those things. The NYMEX has trading on gold options. There was no interest for January, but December 900 puts were selling for $33. Since the contracts are for 100 troy oz., I believe a contract would cost $3,300. Unlike with futures, though, the most you can lose is the amount of the contract. Oil put options are also available on the Nymex.

[David E. Gallaher]

Kolohe,
Barron's had a pretty good story on it. It said their building alone should be worth about $12/share.
If other bidders don't come in higher before the market opens tomorrow, traders could be more spooked by the measly $2 offer than no offer at all.
The good news is that, if $2 holds, at that level, surely most of the worst should be over.
I know you've heard that one before.

[ce]

He's just a grunt, he can't make that kind of decision. No offense.

[Chris Potter]

But if Morgan buys BSC, don't they also assume all of BSC's liabilities? So the fact that the building is worth $12/share wouldn't matter if the liabilities are worth at least $10/share, right?

Disclaimer: I am not an economist, nor do I play one on TV. Indeed, your advanced market technologies confuse and frighten me.

[Colin]

Anyone else smell another Black Tuesday?

Now where can I buy some of those Ron Paul dollars . . .

[Michael Fernwood]

What should the Fed do?

For the past 10 years, everyone's motto in mortgages was we need to be like Countrywide.

This is far from over.

[Chris Potter]

John C Randolph,

The first amendment only mentions speech and press as protected modes of communication. Does that mean TV, radio, telephony, and the Internet are fair game for Congressional regulation of content?

I mean, the feds could stay within the letter of the constitution by issuing dollars as nickel coins instead of paper bills, but that seems like a silly distinction.

[Chris Potter]

Anyone else smell another Black Tuesday?

What are you, crazy? There's no way that's going to happen.

Tomorrow's a MONDAY.

[BakedPenguin]

According to an article on Yahoo, the Fed has guaranteed to cover up to $30 billion of Morgan's losses from the deal.

[TallDave]

What's really scary is that they've dismantled Glass-Steagal, so it's increasingly possible we could see a cascading collapse culminating into the kind of economic Panic that few people alive today can remember.

[Cesar]

So is the market going to crash tomorrow?

[Cesar]

Holy shit, I think I just may have answered my qestion with a google search. Asian markets have just opened and are dropping through the floor.

[Reese]

Ah, none taken.

[alan]

| March 16, 2008, 8:50pm | #
Anyone else smell another Black Tuesday?

What are you, crazy? There's no way that's going to happen.

Tomorrow's a MONDAY.

lol! Anyone checking the Asian markets, with a twelve hour lead time shouldn't they be open now?

[Cesar]

lol! Anyone checking the Asian markets, with a twelve hour lead time shouldn't they be open now?

Nikkei is down -387!

[alan]

You beat me Cesar!

[Cesar]

Unless Bernake pulls something out of his ass to calm people down, the stock market is fucked tomorrow.

[BakedPenguin]

Nikkei is down -387!

Not good, obviously, but not exactly Black Tuesday-esque. That's about a 3% drop.

[Kolohe]

Primary sources: (from calculated risk):
JPMorgan Chase To Acquire Bear Stearns Investor Presentation.

Also, I think the 1/4 point BB just announced is his 'pull out his ass' response for the short short term.

Our stock market will probably take a hit, but we still have to finish the Asian day, then get half-way through the Europe day even before NYSE et al open up.

So it is possible (I give it 50/50, esp depending on how the BSC-JP Morgan merger percolates) of something that has been common lately - a big hit at the opening, but then a rally to a neutral or significantly smaller down level at close.

[von Laue]

Holy shiate. JPM got Bear for $2 per share. Bear was at $20 in freaking 1995.

Bear employees own almost a third of the outstanding stock. This is Enron type decimation of employee money. A few of those f-ers deserve it, but mostly they don't.

This was the second Fed-arranged marriage, after the Citi-Countrywide deal. Springtime is here, and there are going to be a lot more marriages...

[joe]

To debate: What should the Fed do?

Pass sane banking and financial regulations to keep it from happening again.

Otherwise, just get through the mess.

Homeownership rates, btw, are back down to where they were in 2001, and still falling. Meaning that the equivalent of every single homeowner who was able to get into a house on a dumb, sleazy loan in the absense of that regulation - and then some more - are out of those houses. Thanks, feds, for not interfering with the latest Really Great Idea That Couldn't Possible Go Wrong from the get-rich-quick financial geniuses.

[von Laue]

Cesar -- check S&P futures. Sinking like silly.

http://money.cnn.com/data/premarket/

[joe]

Look on the bright side.

It's a dynamic plunge.

Full of pro-growth dynamisticity.

No, no, that's ok. You don't have to wonder if anyone else has a point about economic policy.

[Cesar]

But remember, joe. Its not a recession. Just a "tough period" or whatever Bush/Burnake said.

[Kolohe]

But if Morgan buys BSC, don't they also assume all of BSC's liabilities? So the fact that the building is worth $12/share wouldn't matter if the liabilities are worth at least $10/share, right?

I just finished reading what I posted above, and the JP Morgan people's back of the envelope calculation is they will gain about 1 billion a year in revenue. And they say it will cost them:
a) about 6 billion to complete the merger,
b) About $13 billion (net) in increased exposure to the toxic instruments- net due to the fact that that $20 billion is covered as part of the 30 billion fed package.

So, if they are able to get about half the value off the debt, it pays for itself instantly. And even if its less, it pays for itself within a decade (probably less, because I think I messing up the PV calculation)

The two assumptions their using seem to be:
1) That the unaudited figures are in the ballpark - which we have seen serious discrepancies lately. And trusting the BSC dudes after this past week seems to be as well advised as believing this guy.

2) And even the unaudited figures are close enough, that the only problem are with MBS - and that the remaining liabilities are appropriately accounted for. Now, they seem to have another $10 billion of slop due to Fed injection, but there is no indication of non-MBS exposure they may be taking on.

And a similar caveat to the questioner's. I'm a frackin engineer by education, so really have just the dimmest awareness of what I'm talking about

[Cesar]

Now the Japanese markets are off -515 and falling.

[GILMORE]

I picked a fine time to start a career in investment banking

seriously though, it should make for a fun year. As long as I can keep my job that long.

[Andrew]

The first amendment only mentions speech and press as protected modes of communication. Does that mean TV, radio, telephony, and the Internet are fair game for Congressional regulation of content?

I mean, the feds could stay within the letter of the constitution by issuing dollars as nickel coins instead of paper bills, but that seems like a silly distinction.

Your analogy is inapt. TV, radio, etc. are technological advances not in existence at the time of ratification, but use of paper currency is not. The founders were familiar with paper currency and its attendant drawbacks, and it is certainly possible (or likely, depending on one's view) that use of the word "coin" was not accidental.

[Jeff S.]

"Homeownership rates, btw, are back down to where they were in 2001,..."

Joe, where did you get that stat? The math is not seeming right to me, despite the mess. Maybe it is, but I'd like to see. Thanks.

[Jeff S.]

Never mind, I found it.

[Chinese proverb]

I picked a fine time to start a career in investment banking

may you live in interesting times...

[Kolohe]

Pass sane banking and financial regulations to keep it from happening again.

Otherwise, just get through the mess.

My take:

the regs are there. Due mostly due to policy preference, but somewhat due to deliberate political calculation, they were not enforced.

But even at that the 'banking' sector - as opposed to the larger financial sector - is actually not that bad, due mostly following the regs and having the FDIC net. The retail banking ops seem to be what everyone is trying get a hold of, for instance in the ETrade and Countrywide cases.

So even at that, I'm not sure what additional regulation would done - you could have halted the toxic subprime originations which would have mitigated where we are now, but how do you require 'smart people' to do their due diligence with the securitization process, other than doing what is happening now - getting fucked when the shit hits the fan? That's what happened with the tech bubble and it worked itself out within a year.

[GILMORE]

Proverb: No kidding.

I started a job in market analysis at the beginning of the tech bubble, then lost it when it popped.

Speaking of popped, my old boss had an aneurysm two days after I submitted my resignation this week. The company (small specialist consulting firm) is probably going to shut down operations at the end of this month until he's back on the job.

Point being, I'd likely have been shitcanned for sure and out of the street looking for a gig just when it's probably the worst possible conditions for it. so, timing is a funny thing.

I hope other people out there fare well through this year.

[Dello]

Chinese proverb,
"may you live in interesting times..."

is actually a Chinese curse...and you can see why.

[Dello]

Hang Seng down 920..about 4.5%.

[GILMORE]

Anyone out there understand the implications of the "lending facility" that the fed is authorizing tomorrow? I'm not sure I get it 100% I do understand it's supposed to help prevent runs on the banks, but I'm not sure how it will work in practice.

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee's target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

Release Date: March 16, 2008
For immediate release

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee's target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

[GILMORE]

whoops - sorry about that double-paste

[Franklin Harris]

To debate: What should the Fed do?

I think the Fed should adopt the George Costanza Rule: Since all of the Fed's instincts are wrong, it should just do the opposite.

[Chris Potter]

GILMORE,

I suspect "lending facility" and "injecting liquidity" and the like are simply euphemisms for "printing more money", whatever the technical definitions are.

[Ed]

Who do you suppose made it so easy for the $2 per share buyout? What do you suppose they were paid to make it so easy?

[Kolohe]

Baked Penguin-
Thanks. I didn't think there were commodity options (or futures) that far out.

I know I can do stock options with my td ameritrade account (if I decided to turn it on) Do you have any idea if I could also do commodity option trading of the type you described? (I of course will do some more research before I commit any money)

[SIV]

Bear employees own almost a third of the outstanding stock. This is Enron type decimation of employee money. A few of those f-ers deserve it, but mostly they don't.

WTF?

If they choose to be heavily invested in a single stock they deserve every bit of it.
these people work at Bear Stearns. surely they are aquainted with the term "risk" and know all the investing basics like diversification of a portfolio and "past performance is no guarantee of future results".

[SIV]

What should the Fed do?

Stop lending cheap money on bad collateral.
Obviously they are doing the opposite.

I'd like to think they are trying to temporarily stabilize the "walking around economy" rather than bailing out this guy.

[Kolohe]

Anyone out there understand the implications of the "lending facility" that the fed is authorizing tomorrow?

From what I have been reading today, this seems to be a semi-permanent org to continue doing what they did with the BSC/JP Morgan deal on Fri morning.

Until now (or at least not since the thirties) the discount rate was only available to accredited banking institutions. This seems to expand this anyone in the financial field - so it seems that everyone else (i.e. Leahman and the rest that everyone are also saying in trouble)

The trouble I see is:
1) I don't really have a problem with extending this on a case by case basis like in the case with BSC - even if we hoodwinked, the workload required for the fed board to approve every single one is self-limiting
2) BUT extending this to everyone - without the commesurate oversight and regs that normally come with playing ball, and without the bottom line approval at a very high level - will not only lead to
a) a money supply inflationary spike as every tom dick and harry queues up, but more importantly
b) crosses the streams between the 'banking' sector and the broader 'financial' sector.

Most of the problem we have now is we can't tell the wheat from the chaff. I fail to see how throwing everything into the same silo helps sort things out.

[Chris Potter]

I think what this comes down to is Bernanke realizing if he does nothing we'll definitely plummet into a recession for at least a year, which he'll be blamed for and castigated as the worst Fed Chairman ever.

If he does very iffy things like this, we'll probably be in for a much longer and deeper fiscal crisis, and he'll go down as the worst Fed Chairman ever.

So, from his POV, it's a choice between a definite and a probable evil.

[John C. Randolph]

the main reason we can't go back to the gold standard (et al.) is the same reason why you can't go back to the crib you were in as a toddler - we're simply too big.

Nonsense. You just revalue the fiat money for a realistic price, stop inflating it, and then take it out of circulation over time, just like we did when we retired the civil war greenbacks.

We've transitioned from a fiat currency back to real money twice in this country. The first time was when the continental dollar collapsed, the second time was when we did away with the greenbacks. We've had one orderly transition, and one hyperinflationary collapse. We're going to move off the federal reserve notes one way or the other, and I would strongly prefer that we do it in as orderly a manner as possible.

-jcr

[Mike Laursen]

The sad thing is, the MSM will spin this as another example of the failure of the small government, free market policies of the Bush administration.

I'm not so sure. I know a lot of liberals. I'm surrounded by liberals. As far as I can tell they think of Bush more as a big-government, corporate crony type of guy. They're very hip to the Republicans having given up any claim to being the party that wants to limit spending.

[SIV]

Everything is going to turn around when the $600 checks arrive in our mailboxes.

[MR]

I thought the FED was created to prevent banks from failing.

we should assume the central bank was created to help JPMorgan & friends buy troubled banks for pennies on the dollar.

lets bail everyone out with government money and let the kids of tomorrow pay for it.

it wouldn't be as hard to swallow if the money was getting spent us and the usa infrastructure - but we are getting nothing but the bill. after all these banking ceo's made millions year after year, they just walk away and wash their hands of this mess.

deja vue? silly americans turn off your tv's and learn from where the stench of BS is coming from.

pay attention kids in the back of the class - you have lost control of your government, they do not need your approval anymore - the government is using the USA credit card to no limits. Iraq is showing a surplus in their economy but somehow we are paying for the building of their infrastructure. how can you change this? you can't, dummy, they're using our credit card and the fed keeps increasing our limits - there is no way to curtail spending unless you go to commodity based currency. everyone repeat "bad monetary policy is our biggest threat to freedom" our monetary policy should be the biggest issue in politics, but dumba**&^ want to debate small piddly issues. tackle the big one first the rest can be fixed later.

[Bingo]

Everything is going to turn around when the $600 checks arrive in our mailboxes.

lol

[Jeff Wartman]

Looks like Harry Browne was right when he wrote "How You Profit from the Coming Devaluation"...he was just a couple decades late.

[Graphite]

I was short the financials ETF going into Friday and I'll be short it at the open tomorrow as well. Also have some money in the Japanese yen and the Swiss Franc. Moved all of my 401(k) into cash, bonds, and gold mining shares months ago. (Would love to use it for short positions and foreign currency investments as well but Fidelity is teh suxxor.)

People who read Austrian economics and Austrian-inspired analysts (like Jim Rogers) have been clued into this unfolding crisis for years. You'll note that they're also *not* the ones saying that the solution to this crisis is more regulation, but rather abolishment of the Federal Reserve and a return to free banking.

But hey, I'm sure we should give the 1930s approach one more go, it worked so well the last time around.

[Kolohe]

We've transitioned from a fiat currency back to real money twice in this country. The first time was when the continental dollar collapsed, the second time was when we did away with the greenbacks. We've had one orderly transition, and one hyperinflationary collapse.

I'm not really sure which one you characterizing as which. The post-revolution one, though, was facilitated by the Hamiltonian, pro-proto-wall street, pro-central bank policy of the federal assumption and repayment of all continental debt at parity (and IIRC with the interest owed). I would say I am the one who is more of a Hamiltonian in my comfort with the Federal reserve system - the heir of his pet project the Bank of the United States - so that example is at the very least ironic.

And the post civil war reset was enabled by the practical elimination of the federal government - all that was left for most of the late 19th c were customs guys to rake in the tariffs, the 7th cav to kill the Indians, and dudes to dole out veteran's benefits. I love minimum govt as much as the next dude, but see that it not politically possible, esp in the present climate.

We've been in what seems at the time like deep doo-doo a couple of times since the 1910's, but have always managed to muddle through, and since 1945, always after no more than about a year or so.

Yeah mathematically we dropped to #2 this weekend. It doesn't mean I need to learn to speak Visigoth. We still big - too big to fail? -no of course not. But we're still among the best three or four games in town. Plus, the worst case scenario, at least in our lifetime, is not Rome 476. It's late 20 c London. Gave up its overwhelming #1 position in 19th century to New York and Tokyo. But to this day it's still mostly Visigoth free - and has done pretty well this decade.

As P.J. Orourke said, the inherent fakery of the dollar is balanced by the fiction of the Euro, the fantasy of the Yen, etc. Putting this all on the system, rather than the choices made within that system, is a mistake

[Malto Dextrin]

So, uh, where's my $600 stimulus check?

[Mike Laursen]

Pass sane banking and financial regulations to keep it from happening again.

OK, here's what I don't get, joe. Congress consists of a few hundred people who get together in a room and vote on lengthy legal proposals, usually without reading them. None or few of our representatives got elected on the basis of their knowledge of economics, finance, or banking. Furthermore, all kinds of lobbyists are trying to influence their votes. Why do you have an expectation that such circumstances would be conducive to sanity?

[Graphite]

If the credit crisis is used as a justification for stricter banking regulations, could that be called "disaster socialism"?

[smartass sob]

Everything is going to turn around when the $600 checks arrive in our mailboxes.

At the rate things are going, by the time those checks arrive, we'll need that much just to fill our car's gas tanks for a week.

[wayne]

Unlike many around here, I am not opposed to fiat money, fractional banking, nor the federal reserve system.

I am not picking on you, but I don't think you have thought the whole thing through very well. You are about to become opposed to all those things.

[wayne]

"So if I knew how to do this, I would short gold, oil, and the Euro for closing prices of

$800, $80, and $1.30 respectively sometime in the first half of Jan 09."

Kolohe, you seem to think gold is a commodity. Gold is sound money, hence as long as the dollar is plunging and the other fiat currencies are viewed in the same light gold will continue its advance. Gold is cheap at $1000 per ounce.

Oil is a commodity, but with the unique advantage that it has a more or less indefinite shelf life, unlike wheat for example. Oil is a dollar hedge. As long as the dollar is plunging, oil will advance in price.

[wayne]

Kolohe, you could be right about about the Euro retreating to $1.30 (although I would not make that bet), but the Euro is still an essentially worthless piece of paper whose scarcity depends only on the good sense, and honesty of European politicians.

I will stick with gold.

[Mad Max]

(apologies to James Bond)

Gold Standard
It's the stan- dard that has the Midas touch
Sound money and such.
Fiat money
Beckons you to enter its web of sin
But don't go in

Fiat currency fans say there's nothing to fear
But the folly of their approach has now appeared
For a Gold Standard minimizes these problems
Save our system from death ...

From Mister Fiat Currency
Ameican economy, beware of its rejection of gold
It's getting old

Gold they'll disparage, appeal to your fears
But the follies of fiat currency have now appeared
For a gold standard plus sane spending
Will improve matters ...

Time for the Gold Standard
American needs a solution that's bold
Peg the dollar to gold
Or you're gonna get rolled
Only gold
We love gold, etc.

[Episiarch]

Well why don't you put her in charge?!?!?

[joe]

Mike Laursen,

Over ten years ago, Congress passed a bill directing the Fed to create mortgage lending rules. Note, it's not Congress creating those rules themselves, but avoiding exactly the problem you mention, but directing the "experts" to do do.

Said experts, under laissez-fairie Alan Greenspan and then the Bush adminstration, sat on their asses, because their ideology told them it would better if they ignored Congress.

Oops.

[joe]

If the credit crisis is used as a justification for stricter banking regulations, could that be called "disaster socialism"?

No, because banking regulations aren't socialism.

Tell you what: YOU can call it that, and if keep within a carefully-defined bubble, there might be other people who know what you're talking about.

[DenisL]

"what can the average guy do?"

It may be OK to pick a few specific individual stocks that you believe will do well ( I have some pharmaceutical favorites) and buck the trend but for now buying any stock index funds is not logical. They are gong down a lot more. The interest rate cut is not likely to do much tomorrow. As Greenspan has said, gold is well known as a long term protection against inflation and as a safe haven. Currently with REAL US inflation at nearly 10% it is foolish to TODAY have money in T-bills, US stock funds (some foreign funds, as well as currencies, are still doing relatively GREAT), bonds or CDs. Buy gold. The price of gold has more than tripled since 2000, Up 30% in 2007 and up more than 15% just this year alone. The nuts in DC have still not understood that we can not inflate our way out of the economic problems that are being caused BY the inflation of currencies world wide.

When Bernanke and the gang get serious about inflation like Reagan and Volcker did in the early eighties and RAISE interest rates 3 successive times, THEN it will be time to sell your gold. I would NOT hold my breath. They just do not get it. If you buy gold you will have some capital left to help rebuild America and the world when the dust settles on the remaining economic rubble.

[Graphite]

The idea that this whole situation could have been averted with some slightly-more strict mortgage lending standards is pure wankery. When the Fed shovels money into the economy the credit boom finds ways to flow around *all* regulations. 50% stock margin requirements did nothing to prevent the tech bubble, and some extra documentation requirements would have done nothing to prevent this bubble. It was in the cards the day they passed the Federal Reserve Act in 1913. And when investors finally perceive that--contrary to the wishes of the Keynesian idiots who dreamt it up--the Federal Reserve is *not* bigger than the markets, the collapse of the bubble is just as inevitable.

[R C Dean]

If the purpose of the lending facility is to prevent runs on banks, then I don't see why it should be used to support investment banks.

A run on a bank is when too many depositors try to withdraw their funds, and there isn't enough cash on hand to allow it.

I don't think investment banks have depositors in the first place, so I don't think its even possible to have a run on an investment bank.

[Mike Laursen]

Yes, Congress delegates its authority to regulatory agencies. Delegation does not absolve responsibility.

But a huge part of the problem is that so many Americans think that its the government's job to watch out for them, including bailing them out when they make bad financial deals. It's created a culture of intellectual laziness and ethical passivity. When a bank makes bad loans or someone signs up for one, its because the government didn't do "its job".

[R C Dean]

Note, it's not Congress creating those rules themselves, but avoiding exactly the problem you mention, but directing the "experts" to do do.

Which is, of course, not authorized anywhere in the Constitution.

[Graphite]

Which is, of course, not authorized anywhere in the Constitution.

INNURSTATE COMMERZ CLAUS!!

[Chris Potter]

I don't think investment banks have depositors in the first place, so I don't think its even possible to have a run on an investment bank.

Well, they don't have depositors, but they do have creditors...and those creditors, or the creditors' creditors, somewhere down the line have depositors. So if a big enough investment bank fails, it's going to propagate down the line to deposit banks quite soon.

[joe]

Delegation does not absolve responsibility.

No, but addresses the specific question you raised - how non-experts in Congress can ensure an appropriate level of expertise goes into the rulemaking process.

Which is, of course, not authorized anywhere in the Constitution.

Congress doesn't tell the Joint Chiefs of staff which beach to land on, they simply declare war, and tell them to defeat a particular enemy.

Same thing. If you can exercise power, you can delegate it.

[joe]

And, of course, it goes without saying that regulating commercial enterprises in their inter-state business is consistent with the Commerce Clause.

[Graphite]

And, of course, it goes without saying that regulating commercial enterprises in their inter-state business is consistent with the Commerce Clause.

A function which, apparently, has such broad penumbras and emanations that it includes setting up the largest price-fixing body in the history of the United States, with monopoly power over the currency and the mandate to bail out every bank in sight.

And you thought our government was limited somehow!

[Chris Potter]

Exactly what Graphite said.

I mean, if the commerce clause is that expansive, doesn't it render most of the other powers given to Congress superfluous? Were the Founders getting paid by the word or something?

[Mike Laursen]

No, but addresses the specific question you raised - how non-experts in Congress can ensure an appropriate level of expertise goes into the rulemaking process.

Sort of. I doesn't address whether Congress is competent to oversee the experts, or Congress' motivation to bother overseeing them.

[wayne]

Joe, I could swear you said a year or so ago that Al Gore had abolished the credit cycle and made recessions impossible? Somebody needs to put a size 12 up the Gore-hole over this current fiasco.

[Citizen Nothing]

the last time the gold bugs were really panicking you could pick up an ounce for $850 (1980). If you had put that $850 into an S&P 500 index fund, it would be worth about $20,000 today. If you had the ounce of gold, it would be worth $1050.

[joe]

I haven't the foggiest idea what wayne is muttering about. Al Gore? Hey, look over there! It's Al Gore! *Booooooooo!!!!*

A function which, apparently, has such broad penumbras and emanations that it includes setting up the largest price-fixing body in the history of the United States, with monopoly power over the currency and the mandate to bail out every bank in sight.

Wah wah wah. Go roust some Indians, Andrew Jackson, and let the rest of us live in the the post-iron plough world.

[R C Dean]

If you can exercise power, you can delegate it.

Really, joe, where does it say in the Constitution that Congress can delegate its power to pass laws?

BTW, Congress isn't empowered to command the armed forces, so you're analogy to declaring war doesn't pass muster.

[John C. Randolph]

I thought the FED was created to prevent banks from failing.

Not exactly. It was created to maximize the transfer of wealth to the shareholders of the fed.

-jcr

[Graphite]

Wah wah wah. Go roust some Indians, Andrew Jackson, and let the rest of us live in the the post-iron plough world.

If anything it's your precious Fed that may drag us all back to plowing dusty fields for our subsistence.

[joe]

Really, joe, where does it say in the Constitution that Congress can delegate its power to pass laws?

It doesn't. Only Congress passes laws. In some cases, those laws direct federal agencies to set rules, according to the standards directed by Congress. Believe it or not (and, as a hardcore Republican, I know you don't), the executive branch has to follow those laws.

This is one of those remarkably simple points you have to really work not to understand, isn't it?

[wayne]

"the last time the gold bugs were really panicking you could pick up an ounce for $850 (1980). If you had put that $850 into an S&P 500 index fund, it would be worth about $20,000 today. If you had the ounce of gold, it would be worth $1050."

And the last time the "don't worry, be happy" crowd were panicking, you could pick up one share of the NASDAQ for $5,000. If you had put that $5,000 into gold it would be worth $18,000 today.